COVID-19: Digitalization Boost for Insurers

The crisis a chance for digital innovation

by Dr. Matthias Gröbner und Dr. Nikolaos Vlachantonis

Even sectors that are not dependent on suppliers or have not been forced to close their stores have been hard-hit by the crisis. Insurance companies are struggling with falling interest rates, lower client interest, and higher claims payments. Perhaps the right time to think about plucking up greater courage for digitalization?

“BaFin [Federal Financial Supervisory Authority] does not see the coronavirus crisis as a threat to life insurers,” read the headline in the Handelsblatt on 7 April. The German Insurance Association has published reassuring information on its home page: “German insurers are meeting their payment obligations despite the coronavirus crisis. They ensure liquidity by paying claims for insured losses and working flat out to deal with their clients’ concerns.” And the Süddeutsche Zeitung confirms: “Insurers are accommodating toward their clients in the coronavirus crisis.” So everything is fine and dandy in the insurance business?

Little new business and high combined ratio

Not necessarily. No one can say at this time what financial burdens insurers will ultimately have to shoulder. The heavyweights in the industry can certainly afford to be accommodating to a certain extent. Many insurers, however, are having to deal with payment defaults by corporate clients or deferrals of premium payments by private clients; revenue from premiums is falling. In addition, many companies are insured against breakdowns in the production/supply chain or in the event of business interruptions, and the extent to which damage caused by pandemics such as the coronavirus is covered has not yet been finally clarified. Concerns, even expectations, that companies will no longer be able to repay their loans are growing. Claims expenditure is expected to rise in these insurance divisions. So in general, insurers are facing the risk of an increasing combined ratio that will exacerbate the pressure to reduce costs.

New business is also collapsing in some cases because clients are waiting to take out new policies for financial reasons or canceling consultations with agents out of fear of infection. Freelance brokers in particular are under pressure. They live largely on commissions from new business. If a significant number of brokers become insolvent, this could have a lasting effect on brokerage structures. One consequence of the crisis could also be an increase in new business, however, because companies that have never before purchased insurance covering losses from disrupted supply chains or production stoppages may decide they need these policies.

Brokers and insurance agencies should take advantage of the greater willingness of people to use digital communication methods as a result of the coronavirus crisis to invest more in digital selling methods. Using video and chat technologies to advise current and potential clients had already proven to be viable even before the coronavirus crisis because the regulatory requirements for online counseling and the process for conclusion of policies can also be fulfilled “digitally.”

Working from home not widespread

And what about workflows for insurers? Employees’ ability to work is not a problem in itself in most cases. When a company’s employees largely need “only” computers and software to do their work, they can seamlessly move their activities to the home. But this is where we see differences between companies. Most insurers initially succeeded in coping well with the coronavirus crisis. Even though the proportion of employees working from home is still not very high, insurers were able to expand their capacity for working from home within a short time. Zurich, Allianz, and Debeka, for instance, had already started having employees work from home and had activated their business continuity plans at the beginning of March.

“Companies with large staffs that (must) work from a stationary location because their processes run on stationary client desktops are at a disadvantage for this reason alone because they cannot quickly switch over to a mode of operations in which employees work from home,” allowed Stephen Voss, CEO and founder of Neodigital Insurance, in an interview with V.E.R.S. Leipzig.

Working from home is not a viable option here “because of the technology, lack of secure remote access, or for the absolutely trivial reason that many employment contracts have been concluded without ever giving any thought to provisions for working from home.”

But not all insurers have rigorously implemented business continuity management (BCM) in all areas even though the financial and insurance sector is classified as critical infrastructure (CRITIS), which obligates them to implement BCM measures. In the meantime, there are a number of BCM tools on the market that simplify the modeling of BCM use cases and can use simulations to detect weaknesses, laying the groundwork that facilitate management when a crisis does strike.

Digital innovations few and far between

The coronavirus crisis reveals that insurance companies still have a lot of catching up to do in terms of digitalization and shines a harsh light on digital gaps that have an impact on processes and competitiveness. Most insurers were well aware of this long before the current crisis. “But many insurance companies still fail to take a rigorous approach to realization. Perhaps also because the existing business model is still viable and many of today’s board members generally struggle with the topic of digitalization owing to a lack of know-how and interest,” claimed a Detecon article that is still largely valid now, although written last year. With the appearance of COVID-19, however, no one can turn a blind eye any longer.

It can be assumed that insurers will now take greater action to address digitalization so that they will be better prepared to face possible future pandemics. The utilization of existing and new data (analytics), artificial intelligence (AI), and customer self-services will play an important role here, although they will not be alone. Clients have been open to such a move for a number of years. They can easily imagine having a digital insurance policy and would also interact digitally with their insurer. Detecon's own experience indicates that the prerequisites for the use of big data and analytics are in place at insurance companies and are being used more and more. A majority of surveyed insurance companies have laid the technical foundation for the use of analytics in their data management and data budgeting. We see, however, that progress in the successful use of analytics in sales and in the provision of the required tools throughout corporate and sales units is still moving at a snail’s pace.

Automated claims settlement with AI

Example: claims management. Processing claims costs insurers a lot of money. Besides the costs of the claim settlement itself, the task of adjusting claims often requires performance of a multitude of analog paper processes involving many people, and there are media breaks and high expenses for assessors. A significant proportion of the workforce is involved in reading, sorting, classifying, and forwarding incoming documents so that the claims can be regulated. Whenever there is an insured event of major scope, experts are sent to the site to assess the claim and the amount of damage before the insurer continues work on the case. In many such cases, policyholders could use an app and smartphone camera to document the damage themselves and experts could assess the losses remotely, enhanced as expedient by AI support. An on-site inspection by an assessor would be necessary in fewer instances.

According to a Univers survey, one-third of banks and insurance companies are already using AI and analytics methods, mainly for planning and controlling marketing and sales campaigns. Yet insurers rarely employ AI methods for the analysis of claims. If they did, they could use their results to improve processes to such a degree that comparable claims could be handled and adjusted (in some cases automatically) with the aid of AI.

The Internet of Things (IoT) could also play an important role in preventing damage or reducing its scope. For example, sensors can be installed on machines or in buildings to collect information about their condition, forward the data for automated analysis, and sound an alarm if there are any changes in the normal condition. Policyholders could detect beforehand the likelihood of an incident – such as a leak in a water pipe – and reduce the scope of damage, perhaps even prevent it completely. Broad trust in such technologies is still missing in the insurance industry because of a lack of standards and the concern that clients are not yet willing to embrace these technologies.

What will remain once the coronavirus pandemic has passed?

Working from home will retain the “momentum” it has acquired, as “forced” as it has been in some cases. Insurers should give more thought to implementing concepts for working from home and offer to their employees the opportunity to work remotely and from home, at least on a day-to-day basis. For some people, working from home will have just as little appeal after the crisis as before, but both companies and some employees have now discovered the advantages of flexible working methods and the convenience of video conferencing. Concepts for working from home like these could also be helpful for recruiting. And the clients who currently have had no choice but to accept video or telephone conferences in lieu of personal face-to-face consultation have become accustomed to the “new” style of cooperation. From a cost perspective, insurance companies could exploit this starting position in several ways: through increased digital client communication via smartphone, tablet, or laptop, reduced office space requirements, and more efficient processes.

What should not be allowed to happen once the crisis has passed: insurers postponing their digitalization activities for the moment with the idea of saving money to make up for the loss of premium income and the rising costs of claims. That would send the wrong signal.